A DIFFERENT KIND OF PLANNING ACT PROBLEM: THE SCOPE OF THE OBLIGATION TO OBTAIN CONSENT
By Andrew Salem
When considering subdivision control and section 50 of the Planning Act, Ontario real estate lawyers have been known to refer to minefields, traps and "Planning Act problems". At its basic level, section 50 prohibits the unauthorized "severance" of lands1 and the potential problems (and minefields and traps) are serious because of the consequences of non-compliance as set out in subsection 50(21) of the Act: the transaction may be found to have not created or conveyed any interest in land.
You may be able to solve the problem by applying for and obtaining consent from the local committee of adjustment or land division committee, but it will be important to consider who will be responsible for obtaining the consent and the extent of that party's obligation. There is always the possibility that the application for consent will be unsuccessful, or there may be significant delays and/or unforeseen requirements resulting from conditions imposed by the committee of adjustment. Consequently, while consents may solve Planning Act problems, disputes over the scope of the parties' obligations in relation to the application process can create a whole new set of problems.
The Planning Act clause in the standard form Ontario Real Estate Association (OREA) and Toronto Real Estate Board (TREB) agreements of purchase and sale requires the vendor to "proceed diligently at its own expense to obtain any necessary consent". Even in the absence of a requirement that the vendor "proceed diligently", courts have been prepared to impose an obligation to proceed in good faith, such that a party seeking to obtain consent could not simply stop the process and then seek to terminate its contract.2
The scope of the obligation to obtain consent was recently considered in Southcott Estates Inc. v. Toronto Catholic District School Board3. In this case, the vendor had the contractual obligation to use best efforts acting in good faith to obtain consent of the Toronto Committee of Adjustment to the severance of the subject lands by the closing date. The consent was not obtained and the vendor took the position that the agreement of purchase and sale was terminated. The vendor was found to have breached its obligation,4 and several reasons were cited, including the vendor's failure to contact the planning department and the local City councillor at early stages, the vendor's delay in processing the application, its failure to provide a development plan for the property that had been requested by City staff, the vendor's "strategic decision" to proceed with the committee of adjustment hearing despite indications from City staff that the application would likely be deferred (since no development plan had been provided) and the vendor's failure to keep the purchaser informed during the process.
There may be differing views as to what it means to process a consent application with best efforts and in good faith, but an agreement which expressly requires the vendor to proceed diligently, as in the OREA and TREB agreements, calls for something else. The meaning of this type of provision was considered in John E. Dodge Holdings Ltd. v. 805062 Ontario Ltd.5, where a vendor had contracted to "proceed diligently at its expense to obtain any necessary consent" and the provisional consent was granted, subject to a condition requiring the dedication of lands for a road extension at no cost and construction of the road extension (originally estimated as a $350,000 cost). The vendor terminated the agreement of purchase and sale and the purchaser initiated an action for specific performance. The purchaser was successful at trial and at the Court of Appeal.
The evidence disclosed that when the agreement was signed the vendor had intended to build the road extension. The trial judge therefore found that there was nothing commercially absurd about requiring the vendor to assume the entire obligation. The Court of Appeal also disagreed with the vendor's claim that it had fulfilled its contractual obligation, and cited a dictionary definition of "diligence" as "constant and earnest effort to accomplish what is undertaken." It was noted that the only way for the vendor to obtain any necessary consent was to undertake to bear the cost of building and dedicating the extension of the road, if required, or to appeal the imposition of the conditions if it wished to have the conditions removed.
As these cases illustrate, it is appropriate to consider more detailed terms in your contract so that all parties understand their obligations. Some consent applications are straightforward but the fact remains that the approvals are issued (or not issued) pursuant to a public process under the Planning Act, so there are many potential hurdles along the way. At the very least, there may be delays (as in Southcott Estates), there may be expensive conditions (as in John E. Dodge Holdings), and there is the possibility that the decision of the committee will be appealed to the Ontario Municipal Board (OMB), resulting in additional delays and costs.
With all this in mind, the following are matters to be reviewed once you know that consent may be required.
Does the vendor or the purchaser (with the vendor's authorization6) file and handle the processing of the application? Under most agreements, the vendor has the responsibility for obtaining consent. If an agreement is silent as to who is responsible for obtaining the consent, the courts have held that this obligation will be the vendor's.7
In some cases, a vendor controls the application process but is also able to have the purchaser pay all or some of the costs. The costs of any required reference plan or consultant reports required by the municipality should also be considered, as well as the cost of satisfying the conditions.
Does the other party assist?
To what extent is the non-responsible party required to cooperate with the preparation and processing of the application? For example, background documentation in the vendor's possession may be helpful (or even necessary) to a purchaser making or presenting an application. Also, a purchaser's proposed plans for the property may be relevant (or required, as in the Southcott Estates case) when the vendor proceeds with the application. It may also be appropriate to consider a requirement that the non-responsible party cooperate, upon request, by attending and making submissions at any Committee of Adjustment meeting or OMB appeal hearing.
How far is far enough?
Will the responsible party be required to "proceed diligently" or something less (or even something more)? A party may consider using a "reasonable efforts" concept or something more specific to limit the extent of its obligations. For example, a party may wish to have its obligation limited such that it may terminate the agreement if preliminary discussions with municipal staff indicate that the application would not be successful, or that costly conditions are likely to be imposed. Further along in the process, the responsible party may want the right to terminate if the application is refused or conditions are imposed which the party is not prepared to satisfy. If a party is bound to "proceed diligently" to obtain consent, a court could find that the obligation includes appealing any such decision to the OMB. It would therefore be prudent to consider this possibility in advance and seek to negotiate the ability to stop the process. Similarly, since a third party may file an appeal of a favourable decision by the committee, the requirement to defend such an appeal at the OMB should also be reviewed.
Whenever Planning Act consent is required, it is important to remember that the process can be unpredictable. Even if a "simple" application is approved by the local committee, it may take longer and be more expensive than anybody expected. Accordingly, the parties will benefit from anticipating issues at an early stage so they may allocate risks and responsibilities as part of the transaction and avoid future disputes.
DRAFTING AND NEGOTIATING ADDITIONAL RENT ADJUSTMENT PROVISIONS
By Julie Robbins
A recent decision of the Ontario Superior Court of Justice highlights the importance of carefully negotiating and drafting additional rent provisions in a commercial lease. Ayerswood Development Corporation v. Western Proresp Inc. (2011 ONCS 1399 released March 11, 2011) ("Ayerswood") involves a claim by a landlord for a large adjustment in respect of operating expenses and taxes which were paid by the tenant based on estimates.
Most commercial net lease forms will require tenants to pay certain items of additional rent (in particular, operating costs and taxes) based on estimates determined by the landlord. This can be beneficial to both parties, as it means the landlord has funds available to pay expenses when they come due and it means the tenant generally knows what its monthly lease expenses will be for the year (which will usually be the same amount each month even if the landlord had to pay more in a particular month). If a landlord has not properly estimated an item and requires the tenant to pay an adjustment, it can be difficult for the tenant if it has limited cash flow as it is not likely to budget for this (which means it can be difficult for landlords to recover these amounts).
In the Ayerswood case, the tenant leased premises for 5 years starting on May 1, 2001. The tenant paid all rent due through the term including an estimated amount for operating costs and realty taxes. When the term expired on April 30, 2006, the parties were trying to negotiate a further renewal and when they could not agree on a renewal, the landlord evicted the tenant. On December 10, 2007, the landlord completed its first and only reconciliation and claimed that $42,778.00 was owing by the tenant as an adjustment for operating costs and realty taxes.
Section 3.04 of the lease in Ayerswood provided that operating costs could be estimated by the landlord for a "period" and then went to provide (emphasis added): "As soon as practicable after the end of such period, the Landlord shall advise the Tenant of the actual amounts for such period and, if necessary, an adjustment shall be made between the parties" (paragraph 24). The general practice in the commercial leasing industry is for landlords to deliver annual adjustment or reconciliation statements in respect of amounts paid based on estimates. The language in this lease is not unusual and even though it does not specifically provide that annual statements will be delivered, the reasonable expectation of the tenant was likely that there would be annual adjustments. The landlord in this case did not actually adjust for any periods during the term until after the expiry of the term. The tenant argued that it was not liable for the adjustment since the landlord did not bring its claim "as soon as practicable" as provided in the lease. The landlord argued that the term "period" was not defined and that it could use May 1, 2001 to December 10, 2007 as the "period" and therefore it complied with the lease. The Court agreed with the landlord and noted that the adjustment was made at the end of a "period" and that "[i]f the parties had wished to define the period, presumably they would have included such a definition in the lease" (paragraph 28).
The Court rejected the tenant's argument that a portion of the landlord's claim was barred because of the Real Property Limitations Act (R.S.O. 1990 c. L.15) since the adjustment payable by the tenant was not due until it was billed on December 10, 2007 (so the landlord's six (6) year limitation period started running that day) (paragraph 31). In addition, the Court rejected the tenant's argument that the landlord should be estopped from bringing the adjustment claim because it had waited seven (7) years , reasoning that the tenant knew there would be an adjustment and there was no evidence that the tenant detrimentally relied on the landlord's delay (paragraph 32).
Although the landlord argued that the delay was due in part to a tax appeal, six (6) years is still quite a lengthy period to have not done any reconciliations (on cross-examination the landlord's representative had himself said that the delay due to the appeal could have been three (3) years) (paragraph 12). This result could have been avoided if the lease had defined "period". For example, many commercial leases use the term "rental year" rather than "period" and then define it to be a twelve (12) month period either based on the calendar year, a twelve (12) month period starting on the commencement date or another twelve month period chosen by the landlord. Prudent tenants should insist on this type of language. This decision also raises concerns with using the language "as soon as possible" and the preference would be to specify a time period by which annual reconciliations must be completed (standard periods range anywhere from 90 to 180 days after the expiry of the rental year). By defining the period and having a fixed date by which the reconciliation must be completed, it will enable the tenant to clearly identify when the landlord would be in breach of its obligations and, if necessary, to bring a claim against the landlord.
Annual reconciliations are also important to tenants because there may have been an overcharge of additional rent. Landlords recognize that it can be difficult for a tenant to bear the expense of a large adjustment so they will try to ensure that their estimates are close to actual costs and may adjust the estimate upward in order to ensure that there is a bit of a buffer if any expenses end up being higher than expected. If a tenant has overpaid, it will want annual reconciliations to be completed so that it can be credited with any overpayment (as landlords will not generally agree to pay interest on such amounts, it is not unreasonable for a tenant to expect annual reconciliations and a refund or credit for an overpayment).
Tenants should review their leases for any language which limits their ability to dispute additional rent statements and which would bind the tenant to a statement even if the tenant can show the statement is in error. Often tenants will be required to raise any concerns with a reconciliation statement within a very short period of time from receiving the statement (and there will often be language which provides that the landlord can deliver amended or corrected adjustment statements at any time). A fair and balanced approach may be to agree on a fixed period for both parties (i.e. the tenant must raise disputes within two (2) years and the landlord only has two (2) years to deliver amended statements). This would allow both parties to have the ability to close their books for a prior period after the expiry of this agreed upon time frame. With respect to being bound by a statement that is delivered, the landlord's concern is that there has to be a mechanism for resolving any disputes. Tenants are often reluctant to agree that the landlord should be the party determining any such dispute, but it may agree that a statement is binding if provided by a third party auditor that provides an opinion that the charges are in accordance with the tenant's lease form (tenants that have negotiated any additional exclusions or deductions from the landlord's standard definitions of operating costs and taxes should ensure that the adjustment is to be done in accordance with their lease and not just the landlord's standard lease form). Another approach may be to provide that if the parties cannot agree, the tenant can have the matter arbitrated.
When drafting additional rent provisions, a tenant may also want to consider whether it should have any audit or review rights. For example, the tenant may want a right to review the landlord's books and records in order to confirm that amounts being charged to it are in accordance with the lease. Landlords are generally reluctant to grant this type of right and when it does, these rights will likely be subject to strict conditions. For example, the landlord may insist that the right be personal to the original tenant, that it can only be undertaken no more than once per year, and that the tenant can only review a specified period (i.e. it can review records for that year or the two (2) prior years but it cannot go on a "fishing expedition" for all prior years). Landlords may also want to provide that the audit be undertaken by the tenant and not by a third party or someone being paid based on a percentage of any recovery from the audit. Other concerns will be the amount of notice the tenant has to provide, the location and time of the audit, whether the landlord can supervise the audit, whether the results of the audit must be provided to the landlord (including any discovery of underpayments) and confidentiality. For tenants that do not have the resources to perform audits (or are unable to negotiate such a right), language should be requested which provides that the landlord will, upon request, provide the tenant with back-up information, documentation and invoices in order to substantiate particular items of additional rent.
Another remedy some tenants will insist upon is the right which provides that they will not be required to pay any increase in additional rent estimates until the reconciliation for the prior year is completed. From the landlord's perspective, the concern with this is that the landlord will likely want to increase the estimate at the beginning of a rental year before the reconciliation for the prior year is completed. In this situation, landlords may want to limit the right to the period following the date on which the statement is due (for example, if the landlord is required to reconcile within 90 days of the expiry of the prior rental year, the tenant should be required to pay based on the landlord's estimate until the date the statement is due and if the statement is not delivered, then the tenant can pay based on the estimate for the previous year until the statement is delivered and then any necessary adjustments are completed).
It is important for both landlords and tenants to carefully consider the additional rent adjustment provisions in their commercial leases. It is in interest of both parties that the lease provisions be clear and specific regarding the obligations, rights and remedies of both parties.
For a discussion of limitation periods and overcharges of additional rent by this author, please see the April 2011 edition of Legal Alert (a Carswell publication).
RECENT DEVELOPMENTS WITH DEVELOPMENT CHARGES: GROSS POPULATION METHODOLOGY VIOLATES DEVELOPMENT CHARGES ACT, 1997
By Mark Piel
On March 21st, 2011, the development industry and new home buyers likely let out a long sigh of relief as the Divisional Court of Ontario upheld an Ontario Municipal Board decision regarding the setting of development charges under the Development Charges Act, 1997.8 Practically speaking, the stakes were high. The Court's decision helps ensure that the cost of building and purchasing a new home will not increase solely due to the methodology that municipalities use when calculating development charges.
The Orangeville District Home Builders Association appealed the Town of Orangeville's development charge by-law9 to the Board on the basis that it contravened various sections of the Act. Included in the By-law were development charge rates which were determined using what the Town's consultants called the "gross population method". In short, this method established development charge rates by referencing the estimated gross population of a new development and then estimating the costs of services for the new development. Specifically the Board was asked to decide whether using this methodology for the purpose of establishing development charge rates in the By-law contravened the Act. The Board ruled in favour of the Association and the Town appealed its decision to the Divisional Court.
The Board found the Act requires the following principles to be applied:
- Development charges must be derivative and not original. They are for the increase in costs arising from the increased needs of the service and not for the entitlement or privilege of using the service;
- Development charges must not result in the level of service exceeding the average level of service provided in the municipality over the 10-year period immediately preceding the preparation of the municipality's background study that is relied upon in setting the development charge rate; and
- Development charges must be an estimate of service needs over the future planning period and must take into consideration the excess capacity of services in the municipality as a whole in order to avoid over building and to ensure the appropriate use and capacity of services is maintained.
Development Charge Rates Are Derivative, Not Original
The Board concluded that for development charges to be assessed, the Act requires that development result in an increased need for services and there must be an increase in the capital costs associated with the service because of the increased need.10 The Board, perhaps unsurprisingly, found all new development requires services, but that determination was not sufficient for the purpose of the Act. Instead, the Act requires that development charges are for the increase in costs arising from increased needs of the service and not for the entitlement or privilege of using the service11 Accordingly, the Board found municipalities may only use development charges to fund the incremental needs arising from development over and above existing bundles of services already available in a municipality.12 This theme of connecting increased costs with increased needs is repeated throughout the Board's decision and ultimately the Board concluded the calculation methodology used to set the development charge rates in the By-law went further than what was allowed under the Act.
In its reasons, the Court found the Board did not "read words into" the Act nor did it "read words out", and, accordingly, felt the Board's interpretation of the Act was reasonable and not open to serious debate in this regard.13
Funding of Service Increase Must Not Exceed Level of Service for Previous 10 Years
Central to the Town's argument was the idea that the gross population of the number of residents living in a new development should be the standard from which capital costs for services are derived. In opposition, the Association maintained that relying on the gross population of the residents in the new development meant the Act would again be contravened. Relying on the "gross population method" meant the funding of a service increase would result in the level of service exceeding the average level of service provided over the 10-year period immediately preceding the period examined in background studies relied on by the municipal council when it established its development charge rates.
The Board agreed with the Association. The basic principle behind the Board's decision was simple despite the complexity of various funding formulae. When deciding on a development charge rate, a municipal council must consider the impact of the projected decline in the municipality's population over the planning period during which the increased needs for services are created as a result of development. The Board concluded that a failure to consider the net population growth of the entire municipality meant the per capita cost for the service associated with the new development would exceed the previous 10-year average per capita cost of the service at the time the capital cost was incurred and would therefore contravene the maximum allowable funding for the service permitted under the Act.14 To put it another way, the Board concluded that relying on a "gross population method" will have the effect of funding a service increase with development charges that will provide a level of service higher than what is permitted under the Act. The Board was not persuaded by the Town's argument that municipal councils can never know whether future service levels will mirror population forecasts: "the fact there may be uncertainty does not allow one to abdicate from the responsibilities of properly estimating the future level of service...".15
Even though the Divisional Court found the Board's conclusion on funding formulae was a finding of fact and not law, and therefore not properly within its jurisdiction16, the Board's reasoning is instructive of its purposive reading of the Act. Setting development charge rates is a balancing process of looking backwards and forwards in order to maintain the Legislature's intention as expressed in the statute.
Excess Capacity of Existing Services Must Inform Development Charge Rates
Finally, the Board's conclusion regarding the role excess capacity of services plays in setting of development charge rates was closely tied to its findings regarding the derivative nature of development charges and the maximum funding of a service through the collection of development charges.
Under the Act, the increase in a service attributable to a new development must be reduced by the part of the increase that can be met using a municipality's excess capacity. While the Act does not define the meaning of excess capacity, the Board felt an understanding of the term which did not rely on an analysis of the net population of the municipality in the course of establishing population growth forecasts was seriously flawed. Practically speaking, a municipality reduces the risk that infrastructure will be over-built and excess capacity never reduced when it considers declining population numbers in determining the excess capacity of services.
Related to this risk mitigating approach is the notion that determining excess capacity must be related to future estimations of population growth or decline and are not "snap-shots" of surplus capacity that exists at the time the capital cost is incurred by the municipality. The Board rejected this latter narrow interpretation of excess capacity that was advanced by the Town. Regulations pursuant to the Act describe "committed capacity" - a case of over building which will later be funded by development charges - as the only exception where a reduction of excess capacity is not required.17
The Divisional Court concluded the correctness of the Board's reasons with respect to excess capacity were not open to substantial doubt.18
1 The basic prohibition applies to any conveyance of land by way of a deed or transfer, or grant, or assign or exercise a power of appointment with respect to land, or mortgage or charge of land, or entering into any agreement that has the effect of granting the use of or right in land directly or by entitlement to renewal for a period of 21 years or more.
2 For example, in Hogg v. Wilken (1974), 5 O.R. (2d) 759 (Ont. H.C.), a vendor applied for consent but withdrew the application (one month before the condition date in his agreement) on the basis that it was indicated to him that the committee of adjustment did not favourably view the application and he was therefore under the impression that the committee would not grant the severance. The court found that the vendor was obligated to proceed in good faith with the application and to at least have it considered on its merits.
3  O.J. No. 428 (Ont.S.C.J.), appeal allowed,  O.J. No. 1772 (Ont.C.A.), leave to appeal granted at  S.C.C.A. No. 256.
4 The court awarded damages to the purchaser of $1,935,500 and the vendor appealed, although it did not challenge the trial judge's finding of a breach with respect to the obligation to obtain the consent. The Court of Appeal allowed the appeal, holding that the purchaser had made out a breach of contract but failed to make out a case for either specific performance or damages. Leave to appeal was granted in November by the Supreme Court of Canada.
5 (2003), 63 O.R. (3d) 304 (C.A.) affirming, (2001), 56 O.R. (3d) 341 (Ont. S.C.J.)
6 Under section 53(1) of the Planning Act, an "owner of land or the owner's agent duly authorized in writing" may apply for a consent.
7 Aldercrest Developments Ltd. v. Hunter, , 2 O.R. 562 (C.A.)
8 Development Charges Act, 1997, S.O. 1997, c. 27 [hereinafter the "Development Charges Act" or the "Act"].
9 Town of Orangeville By-law No. 78-2009 [hereinafter the "By-law"].
10 Orangeville District Home Builders Association v. Town of Orangeville, (O.M.B. File No.: DC090049) Decision Date Sept. 3, 2010, p. 9.
11 Ibid. at 10
13 Orangeville District Home Builders Association v. The Corporation of the Town of Orangeville, 2011 ONSC 1639 para. 17.
14 Supra note 3, at 14.
15 Ibid. at 16.
16 Supra note 6, at para. 18.
17 O. Reg. 82/98, s. 5.
18 Supra note 6, at para. 25.
About Fraser Milner Casgrain LLP (FMC)
FMC is one of Canada's leading business and litigation law firms with more than 500 lawyers in six full-service offices located in the country's key business centres. We focus on providing outstanding service and value to our clients, and we strive to excel as a workplace of choice for our people. Regardless of where you choose to do business in Canada, our strong team of professionals possess knowledge and expertise on regional, national and cross-border matters. FMC's well-earned reputation for consistently delivering the highest quality legal services and counsel to our clients is complemented by an ongoing commitment to diversity and inclusion to broaden our insight and perspective on our clients' needs. Visit: www.fmc-law.com
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.